Banking StandardsWritten evidence from James Robertson

1. Introduction

(1) My Credentials. A summary of these can be found in the Preface of my latest book, Future Money: Breakdown or Breakthrough?, published in April 2012 by Green Books.1

(2) Chapter 3 of that book (pages 97–121) is on “Managing the national money supply”. It begins with “Start with the right questions”, and ends with: “A simple thought should end this chapter. The obvious way to reduce our public and private debts is to stop having all our money created as debt. It’s a “no-brainer”. So why don’t we get them to stop it?”.

(3) My suggestion to the Commission is in response to its terms of reference on “implications for regulations and Government policy”.

It is certainly “a matter that the Commission should take into account”.

2. A Question the Commission Cannot Avoid

(1) The number of people asking the question has grown steadily over the past ten years, and is now growing fast. It will soon reach the tipping point, at which it can no longer be ignored. It is:

Why do our government and other countries’ governments continue to give commercial banks the privilege of creating the public money supply as profit-making debt at great cost to public well-being? Is there no alternative?

(2) The Commission should not seem to be avoiding that question. By the time it reports, more people will be suspecting that how the money supply is now created and managed is a basic cause of the financial hardships that citizens of this country and others are now suffering.

(3) What evidence is there for that? Here are three examples.

(a)Positive Money—http://www.positivemoney.org.uk/ . This campaign has made astonishing progress since it started in May 2010.

(b)The American Monetary Institute—http://www.monetary.org/. Founded in 1996, AMI is closely associated with the Monetary Reform Bill recently introduced in Congress.

(c)In August 2012 the International Monetary Fund has published IMF Working Paper on “The Chicago Plan revisited” (WP/12/202).

The following passages summarise its status and contents.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Abstract

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

In spite of the reservation about its status, this IMF working paper suggests that it is reasonable to question if the way we now create and manage the money supply should be changed.

3. A Possible Answer to the Question

I am not suggesting that the Commission should necessarily recommend a change to the government. But it may be helpful to suggest what one might look like.

Since the Chicago Plan in 1936, electronic storage and exchange of money make it possible to simplify the mechanics of achieving the equivalent to 100% reserve backing for bank deposits. A model for the change might be on the following lines.

A basic reform would separate two functions now confused.

(1)It would transfer to nationalised central banks like the Bank of England the responsibility for creating, not just banknotes and coins as now, but also the overwhelmingly large component of the supply of public money consisting of bank-account money mainly held and transmitted electronically.

Having created the money, the central bank would give it to the government as public revenue to be spent into circulation on public purposes under standard democratic budgetary procedures. The central bank would not give or lend any of the money it creates to anyone other than the government.

As at present in Britain, the central bank would be given its monetary objectives by the government and would answer to the government and parliament for its performance. Within those constraints it would have operational independence, as at present.

(2)The reform would prohibit anyone else, including commercial banks, creating bank-account money out of thin air, just as forging metal coins and counterfeiting paper banknotes are criminal offences.

Those two measures together would nationalise the national money supply, and also ease the denationalisation of any commercial banks that have had to be nationalised.

They would also enable all licenced commercial banks to compete freely with one another other in an open profit-based market for borrowing and lending money already circulating after the central bank has created it and the government has spent it.

Under the first measure a public agency would become responsible for efficiently creating and managing the public money supply in the public interest.

Under the second, in addition to offering a more efficient market for exchanging money between lenders and borrowers, loss of the privilege of creating money to lend would bring commercial banks into line with ordinary private-sector businesses that don’t get given their main materials as a free gift. That would encourage banks to provide better services more efficiently to their customers, and make it easier for new entrants to join the payment services industry.

4. IN CONCLUSION

My suggestion to the Commission, in the light of the above, is as follows.

I hope your report to the government will find a way to mention that—as a consequence of the hardships to millions of people resulting from the banking crisis of 2007–08, the developments still arising from it and making things worse, and recent revelations of malpractice by the banks, more and more people are asking:

Why do our government and other countries’ governments continue to give commercial banks the privilege of creating the public money supply as profit-making debt at great cost to public well-being? Is there no alternative?

I am not in a position to advise how your Commission might want to present this to the government. But I feel that failure to mention it would soon be seen as a failure of responsible leadership.

25 August 2012